TOPIC 2.

OTHER COSTING TECHNIQUES

Problems with 1/ Intangibility

target costing 2/ Variability
for services: Value analysis: examine
factors which affect the cost
of a product/service =>
Benefits: It identify devise ways of
the cost at which economically achieving the
customer wants to required standards
buy => focus on
features which Target costing: setting a 7 steps to implement
Absorption rate/ Recovery 3 steps: 1/ What: is the way to
customers value target cost for a product Target Costing? Activity analysis:
rate = Estimated allocation 2/ incorporate overheads
(indirect costs) into the by subtracting a desired How to close a analyze how much is
overheads/Budgeted Apportionment
cost of each product unit profit margin from a target cost gap? being spent on an
activity level 3/Absorption
selling price activity

Problems: over What is target cost: the cost

Absorption at which a product must be Target cost = A Target Cost gap = Estimated
and under
costing Target produced & sold to achieve price - A desired profit cost - Target cost
absorption of
overheads Costing the required amt of profit at
the target selling price. 1. Development stage is very
important: 70%-90% of a
product's costs are determined
in this stage => careful design
in this stage will minimize costs
Compare to absorption: 1/Profit: will
be different in short-term but the
same in the long run 2/Marginal Costing Life cycle costs of a 5 stages of a product 1/Development 2/ 2. Minimize time to the market
To maximize return over a
costing is more useful for decision techniques product: all costs life cycle in Introduction 3/
product's life cycle:
making, absorption costing is attributable to a product manufacturing: Growth 4/ Maturity
needed for financial reporting over its entire life 5/Decline 3. Minimize breakeven time
(when revenue covers all the
Marginal costs incurred to date)
Costing Lifecycle cost can
Lifecycle used in service/
Costing project/ customer 4. Maximize the length
of life span

Benefits: 1/ Help to assess

profitability over the full life of
Marginal cost = total Purpose: assess the total product => decide whether to
Marginal costing: value variable costs per unit of a costs & revenue of a product develop product or not 2/ Possible to
inventories at variable product (contribution = => expected profitability over estimate sales volume & prices 3/
cost (marginal cost) only. revenue - marginal cost) its entire life Can take earlier actions & better
decisions 4/encourage long-term
thinking & planning